Daily Voice: Elara's Harendra Kumar sees scope for positive earnings surprises; says telecom merits strategic allocation in long-term portfolios

Harendra Kumar, MD & CEO of Elara Securities, sees scope for positive earnings surprises, particularly as market expectations have moderated materially. "Commentary has focused on the possibility of weak volumes amid soft margins. However, resilience on the ground suggests there is room for an upside surprise. Our on-ground checks suggest that festive-season volumes may surprise on the upside despite a high base," he said in an interview with Moneycontrol.

He remains constructive on the telecom sector as the industry shifts from aggressive subscriber acquisition towards improved monetisation, supported by tariff hikes, premiumisation and rising data consumption. Telecom merits a strategic allocation in long-term portfolios, although entry valuations and earnings visibility remain important considerations, he said. Meanwhile, Kumar expects the RBI to continue its rate-hiking cycle, with another 75-basis-point increase over the next six months.

In the broader markets, are you cautious about small-cap stocks? Are mid-cap valuations becoming more attractive? We prefer mid-caps over small-caps on a relative risk-reward basis. The Nifty Midcap 100 has de-rated from nearly 29x in July to 23x forward earnings, 5 percent below its 10-year average. In contrast, the Smallcap 100 trades at 21.7x, still 22 percent above its historical average, and commands a 29 percent premium to the Nifty against a historical 6 percent discount.

Importantly, higher interest rates and commodity costs could test profitability, amid tight liquidity conditions leaving small-caps more vulnerable to earnings disappointments. Domestic tight liquidity cycles, rising interest rates and globally tightening financial conditions led by US Dollar Index firming up and higher global yields do not favour small cap outperformance. We therefore favour selective, bottom-up opportunities with pricing power, strong balance sheets and earnings visibility.

What is your assessment of September-quarter earnings? FY27 began against a tough global backdrop: higher crude prices, supply disruptions and rising commodity costs raised concerns about corporate profits. The expected “bad quarter” has not arrived. It seems like the earnings slowdown is being rolled forward. First expected in Q1 moved to Q2, and may now to Q3. Resilient demand, timely price hikes and cost efficiencies have helped companies absorb these pressures better-than-expected.

Government’s timely policy interventions and improved household balance sheets in the backdrop of measures taken in FY26 are also aiding. Although it is still early to assess the full earnings season, the NSE 500 companies reported so far, excluding Energy, have delivered sales/EBITDA/PAT growth of 21 percent/29 percent/27 percent YoY, led by Banks, NBFCs, Metals and Capital Goods. Notably, 21 large-caps outside the Nifty 50 delivered 29 percent PAT growth, against 19 percent for 18 Nifty constituents.

Till now, Q2 also benefited from benign credit costs, broadening loan growth and only partial absorption of September’s crude-price spike. For Q3, passthrough of fuel and commodity costs will test margins across cement, autos and metal-consuming businesses. Do you expect a strong positive surprise in earnings growth in the coming quarters? We see scope for positive earnings surprises, particularly as expectations have moderated materially.

The commentary has focussed on possibility of weak volumes amid soft margins, however the resilience on ground suggests that scope of upside surprise remains. Our on-ground checks suggest that volumes in festive may surprise on the upside despite high base. A supportive volume growth will keep pricing power intact even though Q3 will see impact of higher commodity and borrowing costs. Companies that can protect margins without sacrificing volumes should outperform.

We expect earnings upgrades to remain selective initially, with scope for a broader recovery as cost pressures stabilise by Q4FY27 and early FY28. Are you bullish on telecom? Should telecom stocks be a permanent part of an investment portfolio? We remain constructive on telecom as the industry shifts from aggressive subscriber acquisition towards better monetisation, supported by tariff increases, premiumisation and rising data consumption.

India's average data realisation of Rs 7.5 per GB versus Rs 33 in China suggests further monetisation potential. We expect annual ARPU growth of around 6–7 percent for both Bharti and Jio through FY29, with broadband and digital services providing additional growth opportunities. Telecom merits a strategic allocation in long-term portfolios, although entry valuations and earnings visibility remain important.

Will the year ahead be challenging amid monsoon deficits and geopolitical tensions? While macroeconomic risks look elevated amid monsoon rainfall at 87 percent of normal, September food inflation at 7.7 percent, Brent near US$ 115 a barrel and the RBI beginning its tightening cycle. However, the policy responses of the government to mitigate damage, strong credit cycle and wealth effect in select states is helping to keep demand supportive.

Our analysis over years shows that the transmission of El Nino to output and demand is weakening with rising agri commodity prices countering the negative effect of El Nino. India is also better placed to absorb oil shocks, with net crude imports at 2.9 percent of GDP in Q1FY27 versus 4.3 percent in FY14 ( last time when crude was above US$ 100 a barrel consistently) as energy intensity of India’s growth has eased and government has focussed on diversification.

With domestic demand and earnings holding up, an unwinding of the crowded global AI trade could redirect attention towards quality businesses. Is a valuation reset underway in consumption? The valuation reset in consumption is well underway. The Nifty FMCG index is down 22 percent YTD and trades at 33x forward earnings against its 10-year average of 36x, while our broader NSE 500 consumption basket, excluding telecom, has de-rated from over 50x trailing earnings in September 2024 to 32x.

Importantly, this reflects earnings pressure rather than weak demand: FMCG volumes continue to grow at 9–10 percent, but input inflation has squeezed margins and triggered earnings downgrades. We prefer discretionary consumption, where premiumisation, stronger pricing power and healthier earnings momentum are driving better profit conversion, while staples may see a more meaningful recovery from FY28.

Our bottom-up estimates suggest consumption sales/PAT CAGR of 15 percent/over 20 percent during FY26–29. Much of the broader valuation reset appears behind us, although expensive pockets remain vulnerable. We favour businesses gaining market share and translating demand into sustained earnings growth. After assessing the October policy document, do you expect the US Federal Reserve to keep interest rates unchanged at its December meeting as well?

We expect the Fed to raise rates by 25bp in December. The Fed’s September projections also indicate a year-end policy rate of 4.1 percent, implying one further increase. With US growth resilient and inflation still elevated, we see limited room for an extended pause. For emerging markets, this could keep US bond yields and the dollar firm, potentially delaying a meaningful recovery in foreign capital flows and limiting the options for emerging market central banks like India. We thus expect RBI to continue on its path of rate hike and see another 75-bps hike over next six months.